Bankruptcy official questions Crystal Cathedral compensation

The U.S. trustee and creditors in the Crystal Cathedral bankruptcy proceedings have questioned spending at the Garden Grove-based megachurch, which has long kept its finances under wraps.

In documents filed in U.S. Bankruptcy Court in Santa Ana, the trustee and the creditors concluded that the church paid at least three insiders for what appeared to be redundant duties. They also question the six-figure housing allowance paid to Chief Financial Officer Fred Southard, which allowed him to largely avoid federal income taxes, according to tax documents filed in court.

The documents objecting to compensation proposed by the church give the first look into the long-questioned financial practices at the Crystal Cathedral, which employs more than a dozen family members and in-laws of founder Robert H. Schuller.

The Crystal Cathedral filed for Chapter 11 bankruptcy last month, citing the bad economy and a 24% drop in donations in 2009 for its financial problems. More than 550 creditors are owed between $50 million and $100 million, according to the initial filing.

A church spokesman did not respond to requests for comment Wednesday after a new round of documents were filed in court.

According to court documents, Southard received $132,019 out of his total $144,261 compensation in the form of a housing allowance last year. About $15 in federal income taxes were withheld in 2009, a W-2 tax form filed in court shows.

The Crystal Cathedral requested authorization from the court to pay him a total annual compensation of $156,110, including a $140,000 housing allowance, while the bankruptcy proceeds.

Southard has been the Crystal Cathedral’s chief financial officer since 1978. He owns a home in Newport Beach assessed at $2.3 million, according to property records.

The U.S. trustee questioned why Southard should be employed as director of finance when the church also employs a full-time accountant. It also suggested that Southard should not receive any housing allowance.

“There is no justification whatsoever for a housing allowance of this amount,” according to the documents. “Mr. Southard has failed to explain why such a housing allowance is necessary or appropriate, given this Debtor is in Chapter 11 and suffering financial difficulties.”

In addition, the creditors’ committee, several of whose members have worked with the church for as many as 20 years, called Southard a “figurehead.”

Although the U.S. trustee did not question the legality of Southard’s allowance, such payments made by churches are subject to strict regulations under federal tax law. Only “ordained, commissioned or licensed ministers” who perform certain duties for the church may receive an income-tax-exempt housing allowance.

The Reformed Church in America, the denomination to which the Crystal Cathedral belongs, had no record of Southard being commissioned or ordained as a pastor, according to a spokeswoman.

Southard told The Times on Wednesday that he was ordained as a minister by the Crystal Cathedral independently of the denomination about 10 years ago and has taken the bulk of his compensation in the form of a housing allowance since then.

“That’s what ministers are allowed to do, and so it’s to the individual’s advantage to do that,” he said.

He said that apart from his duties as finance officer, he occasionally preached and led a weekly Bible study over the years. Southard said other church employees who were ordained ministers also received housing allowances but that he was unsure who or how much.

“I doubt that many would spend what I do, because most people don’t live in the area I do,” he said.

In addition to Southard’s housing allowance, the trustee and creditors committee also objected to compensation for the church’s director of programming, Gretchen Penner, who is Schuller’s daughter; and Penner’s mother-in-law, Neva Penner Klaassen, the programming manager.

The church requested approval to pay Penner an annual salary of $69,525 and Klaassen a salary of $55,100. The trustee’s objection cited an appearance of “substantial overlap and duplication” in the two women’s duties. The creditors’ objection, which cited similar concerns, suggested that the two positions be combined.

Bankruptcy documents do not show which employees apart from Southard received housing allotments. But all five of Schuller’s children and most of their respective spouses were listed on the church’s payroll when it filed for bankruptcy in October.

David Skeel, a church bankruptcy expert with the University of Pennsylvania, said the U.S. trustee is clearly taking an aggressive stance in the early stages of the case.

“They usually don’t go over everything with a fine-toothed comb,” he said.

Skeel said churches are not operated like a typical business.

“Church staffs are not always as bottom-line-oriented as a business would be,” he said. “That’s a real issue in a case like this.”

abby.sewell@latimes.com

nicole.santacruz@latimes.com